Bitcoin as Exit, Bitcoin as Voice
Does HODL help with Institutional Change?
The Blockchain Paradox
Thinking up use cases for blockchains has become an international pastime with few equals. Some truly grimace-inducing applications of blockchains have sprouted in recent memory, from ice teas to music band names.
On the one hand, this may not be such an awful thing. It’s a sort of exuberant speciation enabled by the prospect of an especially fecund environment. For instance, during the Cambrian explosion more than half a billion years ago, the variety of life on Earth burgeoned dramatically. While most species that came about eventually went extinct in a series of mass ‘extinction events’, we still have this relatively short period of profligate experimentation to thank for the variety of life we experience around us now. In other words, the truly bizarre creatures that roamed the planet then were side-effects of Nature showing off its capacity for variegated expression of lifeforms, before settling into a somewhat more sedate, sensible pattern.
In analogous vein, the dotcom bubble was an extinction event that wiped out exuberant outcroppings, like Pets.com, and forged others, like Amazon. So, one can take the view that ice teas come and ice teas go, but fundamentally sound ideas, a large variety of which are to be found in the technical underpinnings of Bitcoin, are being forged in the process.
On the other hand, truly bizarre speciation in the crypto-sphere comes not just from the exogenous effects of a blockchain-shaped shot in the arm, but also from, what can be generously described as, ‘human error’, and more accurately as moral hazard.
It is in the nature of good technology to inspire broad adoption; it is in the nature of opportunists to free-ride on the gullibility of adopters. Thus, led astray partly by hype and partly by unscrupulous snake-oil salesmen, it is also in the nature of good technology to overshoot its use cases.
You might say that it matters little that we have WhopperCoins, Putincoins, BitcoinCash and a string of other side-splitting tokens, since, in the long-run, they shall all die out — much like the numerous species that kicked the bucket at the end of the Cambrian explosion — and only the fittest shall survive. And, the whole world would be better for it.
I am not so sanguine about this prospect. ‘Death by blockchain’ is more than the mere problem of hucksters peddling private blockchains when shared databases suffice; consensus protocols that make a dictator’s whim look democratic; centralized coins parading in the jargon of decentralized coins; and, generally, scams in place of knowledge. This sort of naked flummery is a real problem because it slows the development of public blockchain applications that are meant to provide the infrastructural basis for private transactional usage. It is especially invidious because it deliberately conflates fundamentally sound ideas with hype, lies and misdirections. It’s a parasitic virus.
In an environment where very few understand the broader implications of blockchains, the risk of moral hazard destroying beneficial outcomes is always very real.
To understand these implications, one needs to appreciate, what I like to think of as the blockchain paradox: To appreciate blockchaining anything, you must begin with the vast multitude of reasons to stay away from blockchains, rather than seek reasons to operationalize them. You must, for example, begin with acknowledging that blockchains introduce entirely new sources of transactions costs from relinquishing scale economies in data management. You must acknowledge that the best applications assume these new sources of inefficiencies deliberately, as they seek to unlock efficiency gains from reconfiguring transactional networks in the pursuit of disintermediation.
Frankly, if you cannot abide disintermediation as being necessary to and compatible with distributed information, and if you cannot see that distributed information is the fundamental source of efficient markets, you shouldn’t see value in creating any strong alternative to third-party intermediation mechanisms, be they entrenched in culture, courts, central banks, or even companies.
Appreciating the blockchain paradox is essential to resetting the mind, which is, of course, crucial to being able to rebuild and improve upon extant institutional contexts.
Reset the Mindset
Institutions are so well embedded into our environment that they come to define what our status quo context means; collectively, they feed into our status quo biases and explain why we often accept the answer: “Well, that’s just the way it has always been…”
We live in societies with institutions that are so thoroughly interwoven into every aspect of our life that it seems like an almost impossible task to stand outside of this structure — this web of institutions — and analyze how they affect us.
So take a moment to think, even if entirely in the abstract, about escaping one set of institutions in favor of another.
Henley & Partners, a consultancy, publishes a Passport Index. The purpose of the index is to keep track of how well a country’s passport does in terms of permitting its holder to travel around the world without impediments. In the latest ranking, Germany ranks first, permitting its citizens to travel to 177 other countries without a visa; Afghanistan ranks last, permitting its citizens to travel to just 24.
Your ability to leave a country at your discretion is a powerful determinant of your most basic freedom. It is a necessary premise for describing individual freedom because the opposite would quite demonstrably be intolerable repression. The inability to leave any set of institutions from free will — be they associated with a country, a culture, a religion, a society — can be such an abhorrent affront to our lives that it is routinely associated with tyranny. Indeed, Locke even used the simple example of trying to leave a locked room in defining what having free will actually means.
Democracy is a two-sided coin: On one side, it is true that it is best served by engaged citizens who undertake the effort to inform themselves of policies and issues, and to be heard by voting with their minds at the ballot box; however, democracy is also nothing if not a people’s right to express their views on the institutions that govern them, to repudiate them and exercise their ability to vote with their feet. This is the other side of the coin.
Much is the same case with other forms of institutions, too. For example, 18 Muslim-majority countries at present officially penalize apostasy, including some that even specify the use of the death penalty for offenders. Thankfully this is not a frequent occurence, but that it severely abridges individual freedoms is hardly a controversial claim.
The point is that freedom of exit is as important as freedom of voice, and that both are important in the pursuit of a wish to live in an environment characterized by better institutions.
Institutions erect barriers to entry and exit. That is foundational to their raison d’être, and instrumental to understanding how they preserve contexts that are favorable to them. Institutional inertia is not merely a side-effect, it is a deliberate design mechanism; inertia is essential to longevity.
So, perhaps then, it is useful to understand what is now occurring around us in Bitcoin as an experiment in the redesign of institutional mechanisms. The merits of a range of very basic social mechanisms — those that we take as axiomatic fact — are being challenged.
Among these mechanisms that are being reassessed are those that concern every aspect of our lives: There are the mechanisms that concern themselves with the supply of and demand for money; there are those that govern the manner in which market transactions occur among distributed individuals in a society; there are those that form the rationale for the role of government in the creation and enforcement of property rights both within and across societies.
The HODL-FCV Diagram
The rate of exit from one set of institutional orderings to another is a fundamentally important indicator for a changing mindset across a society. The more insititutional aspects —each concerning different orders of time — that are involved in determining this rate of exit, the more transformative and impactful this re-ordering becomes.
We can understand this process of institutional change, rather usefully, using a simple diagram based on just two conceptual ideals: FCV and HODL.
Consider Fiat Conversion Velocity (FCV) in this respect, which can be defined, quite simply, as the rate of conversion of fiat to Bitcoin. It is a crude measure for the built-in inertia in a set of institutions that works to retard the rate of change to another set of institutions. As with any process of institutional change, it is the longer-term pattern of FCV that matters more than what it might be at any given moment in time.
FCV is useful as an indicator for institutional inertia because it represents the level of status quo bias across a society. The stronger this bias is the lower the FCV would be. Indeed, so strong can this bias be among the extant institutions in a society that FCV, in the limit, just becomes 0.
HODL has been criticized time and again by the media, intellectuals, and thought-leaders as being evidence of the abject futility of creating a digital currency that isn’t anointed and managed by the government; it is shown, usually with a good deal of self-satisfaction, as proof of the idea that holding on to cryptocurrencies like Bitcoin, Ethereum or Litecoin is based on the ‘greater-fool theory of investment’; and, it is used, frequently, as an example of a culture that is as deluded as a self-absorbed teenager, which is to say that it is rife with intellectual minions who use LOL and OMG in serious discourse.
Yet, the point of HODL is that it is a journey. Rome was not built in a day, and neither can the infrastructure for a new economy. HODLers are, therefore, the women and men who are at the frontier, laying new tracks, sleeper-by-sleeper. The destination of dreams for each of them may be different: Sound money; disintermediated markets enabling complete contractual platforms; promising investment vehicles; non-territorial crypto-seccession, and others yet unimagined. But, each is based on a necessary commitment made in the present that requires altering consumption biases away from the present.
Any institutional mechanism that is built on enabling present-biased consumption will be more appealing to a rational consumer than one that requires altering entrenched habits in favor of a future-bias in consumption. But, the pursuit of meaningful institutional change requires precisely that.
Figure 1, therefore, shows an inverse relationship between institutional inertia and time preference — between FCV and HODL. The inverse relationship shows that, at lower time preferences, individuals are more willing to HODL and, therefore, are more committed to pursuing avenues for higher FCV, since they are more future-focused. Individuals at higher time-preference levels, by contrast, are far too present-focused to consider alternate institutional orderings. FCV values for them are, consequently, low. For the society at large, this negatively-sloped line shows the institutional environment that an individual faces.
Figure 2 shows an ‘indifference curve’, a useful workhorse borrowed from elementary economics. (A quick reminder, if you don’t quite recall this idea. Basically, the idea is just that my satisfaction diminishes from more of the same: I’ll trade the first bottle from a crate of my favorite wine for one bottle of your bourbon; I’ll need a fair bit more than one bottle of bourbon from you for the last one from my crate! So, along an indifference curve, all combinations are equally valued; an individual’s satisfaction level is held constant as she trades one thing for increasing amounts of another.)
In our context, this curve represents the status quo bias built into the institutional environment. The point at which the indifference curve intersects the inverse tradeoff line depicts the consumption path that the individual chooses — her bias for the current institutional orderings around her as opposed to those alternatives that are incipiently being erected.
Finally, Figure 3 shows two possible changes that could occur in the institutional environment. The orange line shows an environment that puts a ceiling on FCV, but is generally favorable toward Bitcoin adoption. The effect is one of introducing new entrants into the market, but also slows the rate of institutional change. The new point of intersection with the indifference curve is at a higher time preference with somewhat higher FCV than before. There is an increase in present-bias.
The green line, by contrast, shows an environment that is much more favorable towards FCV, but no different in its perspective on adoption. The effect is one of increasing the rate of institutional change, and the bias, broadly, remains more toward the future.
It should be said that the figure is not meant to represent a particular country definitively, but, rather, to understand the effects of particular events that we might find ourselves confronting. Institutions may lurch from being relatively friendly towards broader adoption when they don’t see Bitcoin as a threat to their own longevity, to suddenly becoming adversarial when they percieve the rate of adoption to be portentous.
Capping FCV or quashing it is a clear signal that the freedom of exit is being abridged; disincentivizing longer-term commitments to alternate institutional projects — which is to say, HODL — is a subtler sign that the freedom of voice is being drowned out.
